Ever since Donald Trump’s surprise election victory on Nov. 8, financial markets have been telegraphing a collective sense of optimism about future economic growth. The major U.S. stock indexes set new records, the dollar soared and the yield on Treasury securities rose across the curve.

Before you get too excited about the prospect for the economy to reach escape velocity after seven and one-half years of 2% growth, the financial press is warning that such optimism may contain the seeds of its own destruction.

“Higher rates and a stronger dollar are making money tighter,” according to the Nov. 15 edition of the Wall Street Journal.

“Financial conditions are tightening at an alarming pace,” warned a Nov. 15 headline on the popular ZeroHedge blog.

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Pfff! Just like that, those Masters of the Universe deal a blow to any anticipated stimulative effect from Trump’s proposed reduction in tax rates and regulations, and increased spending on infrastructure and defense. Both articles cite a sudden rise, or tightening, in the Goldman Sachs Financial Conditions Index, which has been at the forefront of the economics profession’s we-can-index-it craze.

The idea of a financial conditions index makes perfect sense on the surface. The central bank tightens or loosens monetary policy, which in turn affects an array of financial variables, which then act to transmit policy changes to the real economy. So far so good.

The problem lies with the interpretation: imputing a fixed meaning to a change in price. (Trigger warning: Get ready for a brief economics lesson.)

The price of any good, service or financial asset may vary because of a change in demand or a change in supply, with very different implications. Yet in the GSFCI, all changes are created equal. Lower long-term interest rates equate to easier financial conditions; higher long rates represent a tightening.

Consider the case where long-term interest rates, a proxy for the price of credit, rise because the public decides to save less and spend more. Demand for credit pushes up the price of credit, which, as reflected in the GSFCI, constitutes tighter financial conditions and a harbinger of weaker demand in the future! If that were really the case, bond traders would be Masters of the Universe — and not only in a work of fiction.

Alternatively, higher prices may be the result of a reduction in supply, in which case the effect would be negative.

This is one of the most basic, important and widely misunderstood concepts in economics. Only a handful of economists understand the application of microeconomic theory to the real world. One of them is Scott Sumner, director of the program on monetary policy at George Mason University’s Mercatus Center, who expresses what I’ve been talking about as a simple rule: “Never reason from a price change.”

“Reflexively, I am not opposed to indexes: leading indicators, a yield spread — as long as they are properly constructed,” Sumner says. “Anything involving interest rates or exchange rates would be very problematic in terms of price change.”

Therein lies the rub. An index or a rule removes discretion from decision-making. In some cases, such as the conduct of monetary policy, this may be a good thing. But when the components of an index require judgment to determine whether a change in the price will have a positive or negative effect, it defeats the purpose of an index.

Goldman’s economics team has retooled its FCI over the years in an effort to improve its predictive powers. In its latest reincarnation, the weighting for the long-term Treasury yield has been increased to 45.1%, the biggest among the five GSFCI components. So it matters a great deal whether the Treasury yield enters the index with a positive or negative sign. (The other four components are the federal funds rate, the trade-weighted dollar, the S&P 500 Index and an investment-grade credit spread.)

Goldman confirmed in a note to clients this week that the main drivers of the recent tightening in the GSFCI have been rising Treasury yields and a stronger dollar, both of which appear to signal expectations for stronger economic growth. Yet both moves constitute tighter financial conditions, as calculated by the GSFCI.

As to Goldman’s claim that the GSFCI has “substantial predictive power for growth,” the evidence doesn’t seem to support it.

The GSFCI set an all-time high (higher = tighter financial conditions) in June 1982, shortly before the end of a 16-month recession in November of that year. The economy was about to take off. Real growth averaged 6.4% in the next two years, including four quarters of growth in excess of 8%. Predictive? Hardly.

The GSFCI shot up again in 1984, coming close to the previous high. Growth averaged 3.7% in the four quarters following that peak.

The GSFCI registered an all-time low in December 1999, coincident with the peak of the tech bubble. The index was still accommodative (below 100) when the economy fell into recession in March 2001. The yield curve had been inverted for almost a year, a sure sign that policy was tight. Yet in mid-2000, based on the GSFCI, Goldman economists expected the Federal Reserve to raise the funds rate by an additional 100 basis points from its 6.5% level at the time.

Instead, the Fed started slashing its benchmark rate aggressively in January 2001, lowering it to 1.75% by year-end.

One more observation: The GSFCI set another cycle peak in October 2002, again just as the economy was set to take off. Economic growth in the ensuring four quarters averaged 4.4%.

Goldman economists were unavailable to comment on the seeming contradiction between their claims about the index’s predictive powers and the data. At a neutral reading of 100.13 this week, the GSFCI is hardly emitting the kind of red alerts reflected in the financial press.

Then again, the historical performance of the GSFCI taken in conjunction with the large weighting for Treasury yields and the flawed methodology of reasoning from a price change (see Sumner Rule above) tell me a yellow, cautionary warning is in order. Not because of the current tightening of financial conditions, but because the index suffers from some incurable flaws.

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